CAD: Hitching A Ride – Credit Agricole

CAD is one of the top performing currencies over the past month among the major G10 countries. In fact, while it moderately declined against the USD since late October, it outperformed the rest of the G10 on the crosses. The average decline was 2.4% with JPY, NOK and AUD the biggest losers against CAD.

We still hold a short NZD/CAD in our model portfolio and also maintain a strong conviction that cross should continue to move lower. The trade is up 0.5% and we target a move to 0.8385 in the coming months.

So what’s driving CAD? We identify two important factors.

First, we note the leverage to US growth. The US economy grew at a 3.9% annualized clip in Q3 and bar the weather-induced slump in Q1 2014 growth has averaged over 4% the past year. The forward looking guidance from less volatile, high frequency data underscore that the US economy is steadily humming above its potential. Given its proximity and trading links this has spilled over to Canada’s economy. Indeed, the release of Canada’s October PMI showed both a strong level and acceleration. Among the 26 countries tracked by Markit Canada ranked third in overall growth and fourth in our measure of acceleration.

Second, the pickup in growth has fed into prices. For instance, CAD’s sharp decline in H1 2014 was driven largely dovish BoC rhetoric amid concerns about persistently low inflation. Q1 2014 marked the low in inflation and since then both the core and headline have gradually moved higher through 2014. What’s more, since January actual inflation releases have exceeded market expectations 80% of the time, which is among the highest in the G10. We suspect the recent decline in oil prices has weighed on CAD but macro fundamentals support CAD on the crosses.